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Ohio Officials Agree to Cancel Income Tax Cut

2 min readBy: Joseph Bishop-Henchman

Ohio’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. —a ridiculous array of nine rates to the thousandths of a percent—could use some simplification. Instead, Ohio in 2005 adopted a complicated package whereby they would phase out the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. over five years, phase in an economically destructive gross receipts tax called the CAT, cut the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. by a half-point, hike cigarette taxes, phase out a distortive inventory taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , and phase in a 21% reduction in the individual income tax over five years.

Scratch that last one now:

The deal reached late Wednesday night resolved what had been increasingly tense negotiations between Gov. Ted Strickland and Democratic lawmakers on one side, and Republicans loath to suspend a tax cut on the other.

On Thursday, a small group of Republicans is expected to support Strickland’s plan to delay the final round of income tax cuts set in motion in 2005. In return, Democrats agreed to a pilot project to test proposed construction contracting changes they believe aren’t ready to be implemented on all public projects. The agreement secured enough votes to get the deal out of the House and Senate, and to the governor’s desk.

A Senate committee is expected to approve the plan Thursday, followed by votes on the House and Senate floors.

Funny how tax increases seem to happen immediately (even retroactively!) but tax cuts often get phased in and then delayed and eventually dropped altogether. In our rankings and measures, Ohio experts have pressured us to give their state full credit as if they had fully phased in all those reforms. We don’t, instead counting only what they have actually done for each year. And this is why!

There’s some debate about whether or not Strickland’s action is a “tax increase.” The tax was going to be lower and now it won’t be. I’d say it counts. But I guess that means President Obama’s estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. plan is a tax cut (since otherwise it will be much higher in 2011 than he proposes)? Or perhaps people measure the future change against the status quo, even though it will change regardless.

Anyways, Ohio ranks 47th in our State Business Tax Climate Index. If they expect to improve their economy, it will take real tax reform that they can enact and stick with.